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Structural Support for Active Management

It appears that the train might be finally leaving the station for “non-transparent” ETFs, ETFs that combine active management with ETF trading liquidity, but without the same transparency regarding underlying holdings. Last week the SEC gave preliminary approval of applications for “non-transparent” or semi-transparent strategies from fund giants T. Rowe Price, Fidelity, and Natixis as well as start-up specialist firm, Blue Tractor. Getting the imprimatur from these industry leaders may go a long way to accelerating their acceptance among advisors, for whom opaqueness is typically a red flag. 

Additional encouraging news for the prospects of these innovative product structures comes from a recent survey by Broadridge Financial Solutions. Of 200 financial advisers surveyed, an impressive 85% said they are likely to use actively managed non-transparent ETFs. 63% of respondents said they anticipate reallocating assets from actively managed open-end funds to the new ETFs.

Looking forward, it will be interesting to see how much non-transparent ETFs cannibalize existing mutual fund assets versus how much they contribute to new sales of active strategies. While advisers are clearly comfortable with ETFs and well aware of their advantages, it may take a bit of time to understand the relative cost, tax and trading benefits of the new non-transparent ETFs and to decide whether the good sufficiently outweighs the bad. 

As it stands now, the prospects for this new structure appear bright, and it would be hard to deny that active management could use all the help it can get in today’s passive driven marketplace.